Apr 1, 2007 12:00 PM, By Lawrence I. Richman, partner, Neal, Gerber & Eisenberg LLP, Chicago

By: By Lawrence I. Richman, partner, Neal, Gerber & Eisenberg LLP, Chicago

It's been a stable of estate planning for many years to have an irrevocable life insurance trust own life insurance. But advisors are careful to warn clients that if they transfer an existing policy to such a trust and die within three years of that transfer, Internal Revenue Code Section 2035 will apply. This section provides that “the value of such property (or an interest therein) would have been included in the decedent's gross estate under Sections 2036, 2037, 2038 or 2042 if such transferred interest or relinquished power had been retained by the decedent on the date of his death, the value of the gross estate shall include the value of any property (or interest therein) which would have been so included.”¹

There is an exception to the three-year estate inclusion rule for “any bona fide sale for an adequate and full consideration in money or money's worth.” Despite this exception, estate planners often view both the insured's sale of a life insurance policy to an irrevocable insurance trust established by the insured, and the sale by an existing irrevocable insurance trust to a new irrevocable insurance trust, as complicated transactions for which the Internal Revenue Service has given insufficient guidance regarding two key tax issues.

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